Crypto as Property: US Tax Treatment for Bitcoin

Every time you buy a coffee with Bitcoin, sell some Ethereum for cash, or get new coins from a hard fork, the IRS sees a taxable event. Not because you made a profit - but because Bitcoin is property, not money. That single rule, established in 2014 and still standing in 2025, turns even the simplest crypto transaction into a tax calculation nightmare. If you’ve ever wondered why your crypto taxes feel so complicated, this is why.

Why Bitcoin Isn’t Treated Like Cash

The IRS made it clear in Notice 2014-21: virtual currencies like Bitcoin are property. That means they’re taxed the same way you’d tax stocks, real estate, or gold. You don’t pay sales tax when you trade your old car for a new one - but you do pay capital gains tax if you sell the car for more than you paid. The same logic applies to Bitcoin. If you bought 1 BTC for $20,000 in 2021 and spent it on a laptop in 2025 when it’s worth $60,000, you owe tax on the $40,000 gain. Even if you didn’t convert it to dollars.

This isn’t a loophole or a gray area. It’s the law. And it hasn’t changed - not after the GENIUS Act in July 2025, not after the CLARITY Bill passed the House, and not even when the SEC classifies a token as a security. The IRS doesn’t care what the SEC says. For tax purposes, Bitcoin stays property.

Three Types of Crypto Property - And How They’re Taxed Differently

Not all Bitcoin is treated the same. How you use it determines your tax category:

• Business property: If you mine Bitcoin as part of a business - say, you run a mining farm with rigs and electricity costs - your Bitcoin is business income. You pay ordinary income tax on its value when you receive it. No capital gains. Just like you’d pay tax on cash payments for your services.
• Investment property: Most people fall here. You bought Bitcoin hoping it’d go up. You didn’t spend it right away. When you sell, you pay capital gains. If you held it over a year, you get the lower long-term rate: 0%, 15%, or 20% depending on your income. If you held it less than a year, it’s taxed as ordinary income - up to 37% for high earners.
• Personal property: This is the tricky one. You used Bitcoin to buy groceries, a flight, or a NFT. The IRS still sees a sale. Even if you lost money on the trade, you still have to report it. If you bought 0.5 BTC for $15,000 and spent it on a $12,000 vacation, you still have a $3,000 loss. You can deduct that loss - but only if you itemize and meet the IRS’s rules for capital losses.

That last one catches people off guard. You think, “I just used crypto like cash.” But the IRS doesn’t see it that way. Every time you spend it, you’re selling property. And selling property triggers a tax event.

How to Calculate Your Gain or Loss - The Math Behind the Rules

You can’t just look at your wallet balance and guess. You need to track every single purchase and sale. Here’s how it works:

First, you figure out your basis - what you paid for each Bitcoin, including fees. Then, when you sell or spend part of your holdings, you subtract that basis from the value you received. The difference is your gain or loss.

Example: You bought 1 BTC on March 1, 2023, for $25,000. Then you bought another 1 BTC on July 10, 2023, for $28,000. You now have 2 BTC with a total basis of $53,000. Later, you sell 1.2 BTC for $72,000. How much tax do you owe?

If you use specific identification - meaning you pick which coins you sold - you could choose the ones bought at $25,000. That gives you a $47,000 gain ($72,000 - $25,000). But you have to prove it. That means keeping records of each transaction’s timestamp, price, and wallet address.

If you can’t prove which coins you sold, the IRS forces you to use FIFO - first in, first out. So you’d sell the first 1 BTC you bought ($25,000 basis) and 0.2 BTC from the second purchase ($5,600 basis). Total basis: $30,600. Gain: $72,000 - $30,600 = $41,400. That’s $10,000 more in taxable gain than if you’d picked the cheaper coins.

That’s why record-keeping isn’t optional. It’s the difference between paying $6,000 or $15,000 in taxes.

Hard Forks, Airdrops, and Other Surprises

Crypto isn’t static. When a blockchain splits, you might get new coins. The IRS has rules for that too.

If a hard fork happens and you don’t get any new coins - no tax. Simple.

If you do get new coins - like when Bitcoin Cash split off from Bitcoin - you owe income tax on the fair market value of those new coins the moment you can control them. That’s usually when they appear in your wallet and you can send them out.

Example: You held Bitcoin on August 1, 2023, when Bitcoin Cash (BCH) was airdropped. On August 5, you saw 0.5 BCH in your wallet and immediately sold it for $150. You owe ordinary income tax on $150. Your basis in that BCH is also $150. If you later sell it for $200, you pay capital gains on the $50 profit.

Same rule applies to any airdrop - whether it’s from a DeFi project, a new chain launch, or a token giveaway. If you get it, you owe tax on its value at receipt.

What You Must Track - And What the IRS Will Ask For

The IRS doesn’t just want your total profit. They want your entire transaction history. For every Bitcoin you’ve ever touched, you need:

• Date and time of purchase
• Amount paid (in USD)
• Wallet address or exchange used
• Date and time of sale or spend
• Value received (in USD)
• What you got in return (cash, another crypto, goods)

That’s a lot. If you’ve traded 50 times a year for five years, that’s 250 entries. Most people use crypto tax software like Koinly, CoinTracker, or ZenLedger to auto-import transactions from exchanges and wallets. But the IRS doesn’t endorse any tool. You’re responsible for accuracy.

And yes - they’re auditing. In 2024, the IRS conducted over 1,200 crypto-specific audits. They cross-check exchange data (like from Coinbase or Kraken), blockchain analytics, and even your bank deposits. If you didn’t report a $10,000 gain from selling Bitcoin, they’ll find it.

Why the Rules Haven’t Changed - Even With New Laws

You might think Congress would fix this mess. After all, the GENIUS Act in 2025 created clearer rules for crypto exchanges and stablecoins. The CLARITY Bill tried to define which tokens are securities. But none of that touched the core tax rule: Bitcoin is property.

Why? Because changing it would mean rewriting decades of tax law. Property rules are baked into the Internal Revenue Code. Currency rules apply to dollars, euros, yen - not digital tokens. The IRS doesn’t want to open that door. Even if you use Bitcoin to pay your rent, it’s still property.

And here’s the kicker: if the SEC says a token is a security, that doesn’t make it a currency for tax purposes. Tax law and securities law live in separate worlds. You could be holding a security that’s taxed as property. Confusing? Yes. But that’s the system.

What You Should Do Right Now

If you own Bitcoin or any crypto, here’s your checklist:

1. Export your complete transaction history from every exchange and wallet you’ve used since 2014.
2. Use crypto tax software to calculate your gains and losses. Don’t guess.
3. Choose your accounting method (specific identification if you can prove it, otherwise FIFO).
4. Report every transaction - even small ones. No exceptions.
5. Keep records for at least seven years. The IRS can audit you for that long.

And if you’re unsure? Talk to a tax pro who’s handled crypto before. Not your regular CPA. Someone who knows the difference between a hard fork and a soft fork, and why it matters.